EU Makes Budget Plans Without UK

EU officials have begun work on a plan to create a long-term budget without the UK in a move that reflects mounting frustration that Britain's demand for a spending freeze cannot be reconciled with the rest of the bloc.

Bloomberg

European Union (EU) flags fly outside the the European Commission headquarters in Brussels.

Both EU officials and national diplomats have been studying the legal and technical feasibility of devising such a budget, according to people familiar with the discussions, ahead of a two-day summit beginning on Thursday in Brussels, where the EU's 27 heads of government will try to reach an agreement on the long-term budget.

The prospects for that meeting have darkened in recent days as several diplomats have come to the conclusion that it will be impossible to accommodate the UK's demands, and are now predicting failure.

"Because of the British stance people are looking, both in national capitals and in Brussels, for a solution at 26. It's being looked at from a financial and legal point of view," one official said.

The plan may be a negotiating ploy to try to put more pressure on David Cameron, the UK prime minister, to compromise. The budget talks will resume on Monday evening when Herman Van Rompuy, the European Council president, hosts a dinner of European ministers.

Officials acknowledge that such an approach – if pursued – would be rife with complexities. It could also have grave consequences for the UK's already fragile relationship with the rest of the EU. "There are people talking about this," a diplomat said, but added: "There are huge questions."

Downing Street on Sunday said it was "sure" the idea was being discussed in Brussels but rejected the idea of a budget deal without Britain as "not acceptable".

"Ultimately we have to agree to spending this money," a spokesman for Mr. Cameron said. "We make a significant net contribution and parliament has a strong view on this."

Mr. Cameron has staked out the most aggressive position in the debate over the long-term budget, which will cover roughly €1,000 billion in spending from 2014 to 2020, calling for a real-terms freeze from 2011 levels.

Sweden has taken a similar position to the UK and other countries could yet thwart a deal. France's President François Hollande said on Saturday that "above all, spending on the common agricultural policy must be preserved".

In my years in Brussels I have learnt never to underestimate the ability of European technocrats to find money

Mr. Cameron's officials believe that chances of a compromise deal this week have increased in recent days from about 10 percent to nearer 30 percent, but believe the most likely outcome is that negotiations will continue next year.

Those member states seeking to close a deal are most worried about Britain because they acknowledge that Mr. Cameron stands to reap big political benefits at home if he issues his veto in Brussels.

David Davis, a leading Tory eurosceptic, on Sunday highlighted the hostile mood on the Conservative benches when he called for Britain to have two referendums on Europe: the first on a new negotiated membership settlement and then a straight in-out poll on whether Britain should continue as a member on the new terms.

The alternative budget being considered in Brussels would be done on an annual basis, which – under EU rules – requires qualified majority votes. By contrast, the traditional long-term budget, which covers seven years, requires unanimity.

It would involve passing a raft of legislation on this basis to authorize hundreds of billions of euros in EU development funds, according to diplomats. But one problem is that the revenue component of the budget requires unanimous approval of members states.

(Read More: Germany Grumbles as UK Waffles on EU Integration)

Without it, budget rebates for Germany, the Netherlands and Sweden would be put at risk, as well as the system used to collect customs duties and other sources of EU funding. "It would be a technical nightmare," one diplomat said.

Mr. Van Rompuy tried to mollify the UK last week by presenting a draft budget that included about €80 billion in cuts from that proposed by the European commission, the EU's executive arm – including deep reductions to agriculture spending that have infuriated France.

But at a meeting on Thursday, the UK's ambassador to the EU, Sir Jon Cunliffe, demanded further "across-the-board" cuts, according to diplomats, particularly to the salaries and benefits of EU civil servants.